Keynes And The Expectations For Profit In Conditions Of Uncertainty

Abstract

The aim of this paper is to question the existence of economic laws that can uniquely determine capitalist ‘equilibrium’. The presence of uncertainty is one of the conditions that cannot be eliminated, which can make the equilibrium unstable and precarious. Therefore we will try to find possible improvements in the techniques of modern capitalism through collective action, beyond the rationale of ‘laissez-faire’. All this in a keynesian methodological view and in the presence of a social pact which, by committing the parties to the attainment of collective goals, minimizes the conflict.

If a separation between spending decisions and savings decisions is assumed, the role of an external subject that can affect the current and expected profitability is particularly important. Thus, this issue will be addressed, that is, the expectation of profit in a system of uncertainties, where well-governed capitalism can represent the closest frame to the most efficient system to achieve economic goals.

Posted for comments on 23 Jul 2017, 4:32 pm.

Comments (1)

The abstract announces an interesting and important issue: what determined the unemployment equilibrium (although unstable and precarious) in Keynes’s macroeconomics with specific focus on the impact of uncertain profit expectations. The specific Keynes flavor in addition to uncertainty is introduced by assuming that decisions on real investment and savings are separated (lack of aggregate demand).

The paper consists of 7 sections which are surprisingly unrelated. Unfortunately, this incoherence makes the paper rather uneven and unfocused on the topic announced in the abstract.

All way through the paper there are a number of interesting reflections, but they don’t add up to a coherent story about business behavior under uncertainty and the macroeconomic implications.

The author is right explaining within the two initial sections that under-employment equilibrium/position can be explained by firms having – in the aggregate – too low expected demand for goods and services (due to low real investments compared to savings) and/or no profit incentive to expand production. This situation might be the consequence of ever present uncertainty concerning the future or other dysfunctional relations within the economy e.g. speculation, fixed exchange rate etc.

The author is also right in claiming that Keynes’s major concern was not the business cycle – but the persistent under-employment experienced during the interwar period. This theme, as many others during the paper, is just mentioned, but not properly analyzed or argued.

The formalizing in section 4 is not really useful. I am in sympathy with the ‘supply function’ being a mix of expected demand and profitability; but the math is not correct, variables not all defined – and, where has uncertainty gone? Of course, not an easy question to answer, but taking the title into consideration something on this issue would have been expected and is therefore missing. In the following text, suddenly four different definitions of ‘demand’ appear (although without mentioning ‘effective demand’?).

Section 5 is one page devoted to ‘neoclassical synthesis’, which according to my knowledge, does not mention ‘uncertainty’ one single time. As we know the ISLM-diagram is the short term presentation of New-Keynesian general equilibrium theory.

And this derailing of the paper continues in section 6 called ‘interpretation of the capitalist system’, which could be interesting. But the main reference is Patinkin, another neoclassical interpreter of Keynes.

In section 7 the sharp methodological difference between new-Keynesian and post-Keynesian macroeconomics is briefly, but clearly presented. One major difference is, of course, macroeconomics without uncertainty (New-Keynesian) and with emphasis on uncertainty (Post-Keynesian). I would have liked to have seen at least one convincing concluding presentation of why and how uncertainty makes such a methodological and therefore analytical difference – for instance be going through, carefully, Keynes’s chapter 19 or the post-Keynesian theory of wage-led growth.

So, I appreciate and respect the authors fine intention expressed in the abstract. But the paper does not give a clear, coherent argumentation on how uncertainty penetrates the expectation of profit and therefore contributes to the understanding of persistent under-employment (equilibrium).

I can recommend and have got inspiration myself from: Fanning, V. and D. O’Mahony, The General Theory of profit equilibrium: Keynes and the entrepreneur economy, Basingstoke: Macmillan, 2000.